Debt-for-Climate Swaps: a controversial tool to unlock climate change mitigation and adaptation in countries with high debt burden

This policy brief provides an in-depth analysis of Debt-for-Climate (DFC) swaps, focusing on restructuring sovereign debt to support climate change mitigation and adaptation measures in countries with high-debt burden. It expounds DFC swaps’ current limitations, including free-riding incentives, insufficient credit enhancement funding, and high transaction costs. By proposing pragmatic strategies to enhance DFC swap efficiency, such as streamlining processes and broadening creditor participation, the brief aims to inform policymakers, financial institutions, and private sector actors on optimizing D FC swap effectiveness. The publication, authored by Luisa Weber, Laila Darouich, Igor Shishlov and Axel Michaelowa, highlights how integration of DFC swaps into broader governance reforms is crucial for ensuring sustainable climate finance solutions and mitigating long-term debt risks.